Labour Markets, Education and Duality of Returns

Abstract

The aim of this paper is to examine the impact of increased trade on wage inequality in developing countries, and whether a higher human capital stock moderates this effect. We look at the skilled-unskilled wage differential. When better educated societies open up their economies, increased trade is likely to induce less inequality on impact because the supply of skills better matches demand. But greater international exposure also brings about technological diffusion, further raising skilled labour demand. This may raise wage inequality, in contrast to the initial egalitarian level effect of human capital. We attempt to measure these two opposing forces. We also employ a broad set of indicators to measure trade liberalization policies as well as general openness, which is an outcome, and not a policy variable. We further examine what type of education most reduces inequality. Our findings suggest that countries with a higher level of initial human capital do well on the inequality front, but human capital which accrues through the trade liberalization channel has inegalitarian effects. Our results also have implications for the speed at which trade policies are liberalized, the implication being that better educated nations should liberalize faster.

Acemoglu, D. (2001) ‘Human Capital Policies and the Distribution of Income: A Framework for Analysis and Literature Review,’ Treasury Working Paper Series 01/03
http://ideas.repec.org/p/nzt/nztwps/01-03.html

Cockburn, J. (2002) ‘Trade Liberalization and Poverty in Nepal: A Computable General Equilibrium Micro Simulation Analysis’, The Centre for the Study of African Economies Working Paper Series. Working Paper 170, http://www.bepress.com/csae/paper170.

Chen, S. and M. Ravallion (2003) ‘Household Welfare Impacts of China’s Accession to the World Trade Organization’, World Bank Policy Research Working Paper 3040, www.econ.worldbank.org/files/26013_wps3040.pdf.